On December 3, 1999, the Food and Drug Administration ("FDA") published its final rule implementing the Prescription Drug Marketing Act, Pub. L. 100-293, ("PDMA").(fn1) Congress passed the PDMA to prevent the diversion of prescription drugs for use other than under the supervision of a prescribing physician. The PDMA imposes restrictions on a wide range of activities related to the distribution of drugs and drug samples. The regulations will be of significance to many different segments of the health care community, including drug manufacturers and distributors, hospital pharmacies, the pharmacies of other health care entities such as long-term care facilities, physicians and charitable institutions that provide prescription drug products to indigents.

The PDMA rulemaking process began with a set of proposed rules that FDA published in 1994. The final regulations retain many provisions from the proposal while modifying others significantly. The final rule includes the following important provisions:

• Requirements for distribution of drug samples to physicians and pharmacies of hospital and other health care entities, including conditions for physician request and receipt forms;
• Requirements for manufacturers and distributors to review their inventory of drug samples, investigate discrepancies, significant losses and thefts, and file reports with FDA;
• Conditions on donations of prescription drugs to charitable institutions;
• Bans on the sale, purchase or trade of drug samples or drug coupons (with certain exceptions);
• Standards for distribution of prescription drugs by authorized distributors of record, as well as by unauthorized distributors;
• Restrictions on the reimportation of prescription drugs to the manufacturer or for emergency care; and
• Criminal and civil penalties for violations.(fn2)

This memorandum provides a general overview of the provisions of the new rule.

The final rule is complex. It will create a need for significant changes and organizational revisions by many manufacturers and distributors. Accordingly, FDA has set a one year period for it to take effect. The effective date of the rule is December 4, 2000.

A drug sample is defined as a unit of a "prescription drug that is not intended to be sold and is intended to promote the sale of the drug."(fn3) Under the PDMA, manufacturers and distributors may distribute drug samples to practitioners licensed by law to prescribe them, or to hospital pharmacies or health care entity pharmacies at the request of a physician. Retail pharmacies, however, may not receive samples. Samples may not be distributed in response to open-ended or standing requests. Instead, the manufacturer or distributor must receive individual written requests from the practitioner for each sample or group of samples.(fn4)

1. Labeling Of Samples

   Each unit of a drug sample must be marked to indicate that it is a sample, e.g., "sample," "not for sale," or "professional courtesy package."(fn5) In response to comments, FDA stated that it would not object to the use of stickers with the word "sample" or equivalent language on container labels. These labels should be difficult to remove, and attached so that removal would be evident if it occurred. The goal is to deny would-be diverters a market-ready product.(fn6)

   The regulations require manufacturers and distributors to include on the label of the sample unit and its outside container or packaging (if any), an identifying lot number or control number for tracking the distribution of each unit.(fn7) The proposed rule would have required the use of lot and control numbers on all labeling, including package inserts. In response to comments, FDA dropped that provision as too burdensome. It limited the requirement to product containers and outside packaging.

   In the preamble, FDA also discussed "starter packs." These are prescription drug products distributed by manufacturers or distributors to pharmacists without charge, to be stocked and sold at retail. Starter packs are not drug samples under the PDMA because they are intended for resale. FDA noted that some companies have used terms such as "starter," "starter samples," and "patient starter pack" to refer to drug samples. FDA advised manufacturers and distributors not to use these terms on sample labels because they are identified with products that are not samples.(fn8) In addition, FDA noted that while starter packs are not subject to the PDMA, because they are not drug samples, they are nonetheless vulnerable to many of the same concerns over diversion. The agency recommended that manufacturers and distributors institute accounting, audit and security systems to guard against diversion.

2. Distribution Of Drug Samples By Mail Or Common Carrier

The regulations permit manufacturers and distributors to distribute drug samples through the mail or by common carrier, provided that the following conditions are met:

• The licensed practitioner executes and submits a written request prior to distribution of the drug sample;
• The manufacturer or distributor verifies with the appropriate state authority that the authorized practitioner is actually licensed to prescribe the drug product;
• The recipient of the sample executes a written receipt at the time of delivery; and
• The receipt is returned to the manufacturer or distributor.(fn9)

The burden is on the manufacturer or distributor to verify the practitioner’s authority to prescribe the drug requested. In response to comments, FDA noted that once a practitioner’s number is verified, the manufacturer or distributor may use internal tracking numbers so that it does not have to reverify the authority each time a sample is requested. However, any list of licenses or authorization numbers must be updated at least annually to reflect possible changes in license or Drug Enforcement Administration ("DEA") status.(fn10)

                                  2.  Content Of Requests And Receipts

Manufacturers may give practitioners pre-printed forms on which to make requests for drug samples. These forms may be sent by mail, common carrier or electronic means. However, those sent electronically must meet requirements for security and authentication of electronic records.(fn11)

The regulations also set minimum content requirements for the practitioner requests and receipts. A written request for a drug sample must contain:

• The requesting practitioner’s name, address, professional title and signature;
• The practitioner’s state license or authorization number, or, if a scheduled drug product is requested, his or her DEA number;
• The proprietary or established name and strength of the drug sample requested;
• The quantity of drug requested;
• The name of the manufacturer and distributor; and
• The date of the request.(fn12)

These conditions are the same as those listed in the statute, except that FDA has added the requirement to include the practitioner’s license number.

Manufacturers may use bar codes on preprinted request forms to identify the name and strength of the drug requested, provided that the information is also translated into words, so that the practitioner knows what he or she is requesting. The bar coding must be placed so that it will not cover up, or otherwise interfere with, practitioners’ ability to read the words on the form.(fn13)

Receipts acknowledging delivery of a drug sample must contain:

• For samples delivered to practitioners: (1) the name, address, professional title and signature of the practitioner or practitioner’s designee who acknowledges receipt; (2) the proprietary or established name and strength of the drug sample delivered; and (3) the date of delivery; or

• For samples delivered to pharmacies of hospitals or other health care entities: (1) the name and address of the requesting practitioner; (2) the name and address of the hospital or health care entity designated to receive the drug sample; (3) the name, address, professional title and signature of the person acknowledging delivery of the drug sample; (4) the proprietary or established name and strength of the drug sample delivered; and (5) the date of delivery.(fn14)

Manufacturers and distributors must retain the receipts and requests for three years. They must be available on request to federal and state officials engaged in the regulation of drugs or the enforcement of laws governing drugs.

One commenter asked whether a manufacturer must stop sending drug samples to a practitioner who fails to return a receipt. FDA stated that this is not necessary for isolated incidents. The clear intent of the PDMA is to identify patterns of conduct that may signify diversions. The purpose of the receipt process is to prevent diversion, loss or theft. Its goal is not absolute compliance with procedure, but rather to safeguard those underlying concerns. A single failure to return a receipt need not trigger action. However, a manufacturer who detects a pattern of non-returns should halt distributions of samples to the practitioner and investigate.(fn15)

In response to comments, FDA stated that manufacturers or distributors may utilize a common carrier’s electronic delivery verification systems to fulfill the written receipt requirement. However, the system must be able to transmit all of the information required by the regulation. According to the comments, the electronic delivery verification systems available at this time are not configured for all of the mandatory information.(fn16) FDA does permit the combination of electronic and paper media to create a receipt form. These combinations must: (1) meet the requirements of 21 C.F.R. § 11 for electronic recordkeeping; and (2) provide a reasonably secure link between the paper and electronic records such that the combination is trustworthy and reliable and the signer cannot readily repudiate the signed record as not genuine.(fn17) Thus, to the extent that it is practical, a manufacturer or distributor could utilize a electronic delivery verification system, and supplement it with a written receipt for any information that would be lacking.

                                  3.  Inventory And Reconciliation

The regulations require manufacturers and distributors to establish, maintain and adhere to written policies and procedures describing their administrative systems for distributing drug samples by mail or common carrier, including a methodology for reconciling requests and receipts.(fn18) The rule does not set specific criteria for these policies and procedures.

             C.  Distribution Of Drug Samples By Representative Or Dealer

1. Single Form For Requests And Receipts

   Manufacturers and distributors may also distribute drug samples through their representatives or dealers. To do so, they must obtain written requests and receipts with the same information as those for samples distributed through the mail or by common carrier.(fn19)

   In distributing samples, a representative may use a single form for both the request and the receipt. Moreover, if the request and delivery to a practitioner are simultaneous, the form can be executed with a single signature for both. However, the request form may only be signed by a licensed practitioner. If the request and receipt are combined, that is the only signature that is acceptable. Deliveries to the pharmacy of a hospital or health care entity cannot be simultaneous with the request by the licensed practitioner, so a single signature is not permitted.(fn20)

2. Inventory And Reconciliation Of Drug Samples

Manufacturers and distributors who distribute drug samples through representatives must conduct a physical inventory of all drug samples, at least annually. All samples in the possession or control of representatives must be inventoried and recorded by proprietary or established name, dosage strength and number of units.(fn21)

In addition to the inventory, manufacturers and distributors must reconcile the results of the physical inventory with the most recently completed prior physical inventory. They must create a reconciliation report which will include:

• The inventory record for the most recently completed prior inventory;
• A record of each drug sample shipment received since the most recently completed prior inventory, including the sender and date of shipment, and the proprietary or established name, dosage strength and number of sample units received;
• A record of drug sample distributions since the most recently completed inventory showing the name and address of each recipient of each sample unit shipped, along with the date of shipment and proprietary and established name, dosage strength and number of sample units shipped; and
• A record of drug sample thefts or significant losses reported by the representative since the most recently completed prior inventory, including the approximate date of the occurrence and the proprietary and established name, dosage strength and number of sample units stolen or lost.(fn22)

Manufacturers and distributors must also prepare a summary record to help check the accuracy of the reconciliation. It summarizes the information described above, including, for each type of sample unit (i.e., sample units with the same proprietary and established name and dosage strength), the total number of sample units received, distributed, lost or stolen since the most recently completed prior inventory.

The reconciliation report may consist of several different documents, provided that they contain all of the required information when taken together, and they are maintained in a single report. Manufacturers and distributors may use bar coding to represent the proprietary and established name and dosage strength of a drug product in the inventory and reconciliation reports. However, the bar codes must be capable of: (1) detecting discrepancies; (2) translation into words; and (3) being produced in their entirety to FDA on inspection.(fn23)

A significant change from the proposed rule is that FDA does not require inventory and reconciliation to be conducted by persons other than the manufacturer or distributor’s "representatives, their superiors or managers, or others in their direct line of supervision or command." This would have created a significant burden, essentially requiring companies to bring in outsiders not involved in distribution of samples to conduct inventory and reconciliation. The final rule permits representatives and supervisory personnel to conduct inventory and reconciliation, provided that there are appropriate internal controls.(fn24)

FDA did not set specific requirements for internal controls for inventory and reconciliation. The preamble states that they should include a security and audit system controlled by independent personnel, i.e., personnel other than the representatives, their superiors or managers, or others in their direct line of supervision or command. The regulations require manufacturers and distributors to establish, maintain and adhere to written policies and procedures describing their administrative systems for:

• Reconciling requests and receipts, identifying patterns of nonresponse, and establishing the manufacturer or distributor’s response when such patterns are found;
• Conducting the annual physical inventory and preparing the reconciliation report;
• Implementing a sample distribution security and audit system, including random and for-cause audits of sales representatives by personnel independent of the sales force; and
• Storage of drug samples by representatives.(fn25)

FDA leaves the details of these systems to the individual companies. While outside personnel need not conduct reconciliations, the audit system maintains the requirement for external review.

             D.  Investigation And Notification

1. Investigation Of Falsified Records Or Diversion

A manufacturer or distributor with "reason to believe that any person has falsified drug sample requests, receipts, or records, or is diverting drug samples," must notify FDA, by phone or in writing, within 5 working days, immediately initiate an investigation, and provide FDA with a complete written report including the reason for and result of the investigation, not later than 30 days after the investigation began.(fn26)

FDA did not define what level of suspicion of falsehood or diversion is sufficient to trigger an investigation. Companies have flexibility to evaluate each situation. The agency reiterated that investigations are necessary where a pattern of discrepancies exist or where other reliable information indicates possible falsehoods.(fn27)

It is important to note that the investigation requirement applies to any misconduct a manufacturer or distributor may discover, and not only to that of its employees. In response to comments, FDA stated that because manufacturers are in the best position to identify diversions or falsehoods by its employees or others, the burden falls primarily on them. They must investigate whenever they have reason to believe that any person has falsified records or diverted product. Thus, for example, a manufacturer that had reason to believe a physician to whom it distributed samples was engaging in diversion would have a responsibility to investigate.(fn28)

     2.  Investigation Of Significant Loss Or Known Theft

The regulations require manufacturers and distributors that distribute drug samples and become aware of a "significant loss or known theft," to notify FDA, by phone or in writing, within 5 working days, immediately initiate an investigation, and provide FDA with a complete written report including the reason for, and result of, the investigation, not later than 30 days after the investigation began.(fn29)

This requirement for investigation applies to actual thefts or losses, not suspected ones. Thus, there is a higher level of certainty to trigger notification, i.e., actual awareness rather than "reason to believe." Thus, by the time a manufacturer notifies FDA and begins an investigation under this provision, it is assumed that a theft or significant loss has taken place. Insignificant discrepancies or bookkeeping errors should have been weeded out prior to taking action.

FDA declined to set a threshold for when an inventory loss is "significant" for purposes of the regulation. Losses may occur in a number of ways, including losses of shipment in transit, loss by representatives and unexplained inventory discrepancies. For shipping losses, companies may wish to set a policy that losses above a certain dollar amount will be deemed significant. This amount would vary by company, depending upon its size, the number of representatives that it has, and the size and value of its total inventory. However, shipping losses should also be considered over a "fixed, rolling period of time," to determine whether a pattern of losses might indicate diversion. Diversion may be indicated in several ways, including: (1) a single loss that exceeds the company’s threshold; (2) a number of loss events over a fixed, rolling period of time that exceeds the company’s threshold; or (3) a volume of lost products over a fixed, rolling period that exceeds the company’s thresholds.(fn30)

However, FDA noted that thresholds should not be applied mechanically. Manufacturers and distributors should consider the nature of lost materials. For a drug with a high potential for diversion, loss of a moderate amount of sample may be far more significant than the loss of greater quantities of another sample with a low potential for diversion. A qualitative evaluation must be applied along with the use of quantitative thresholds.

Regarding unexplained inventory shortages, FDA expects firms to set thresholds for distinguishing between insignificant accounting mistakes and significant losses. These determinations may be based on a firm’s experience in sample distribution and the accuracy of its internal audit and security system. Moreover, some firms might be able to set a "historically validated statistical baseline" for minimal amounts of inventory shrinkage attributable to routine accounting errors, mistakes or losses, and a statistical baseline for frequency of occurrences. This could be used as a tool to determine when losses are significant and merit investigation.(fn31)

In response to comments, FDA stated that it will not pledge not to challenge a manufacturer for following its own thresholds, but noted that the best way to ensure that no enforcement action will be taken is to establish and follow a system consistent with the rules and discussions in the preambles.(fn32)

4. DISTRIBUTION OF DRUG SAMPLES TO CHARITABLE INSTITUTIONS

Charitable institutions may receive drug samples for dispensing to their patients, either as donations from licensed practitioners or from other charitable institutions. Donated drug samples must meet the following conditions:

• The donated sample must be received by the charitable institution in its original, unopened packaging with its labeling intact;
• The donated sample must be delivered by mail or common carrier, collection by the recipient charitable institution or personal delivery by a licensed practitioner or agent of a donating charitable institution;
• The donor must place the drug sample in a sealed carton for delivery or collection;
• A donated sample may not be dispensed to a patient until it has been examined by a licensed practitioner or registered pharmacist at the recipient charitable institution to confirm that: (1) the donation record accurately describes the sample delivered; and (2) the drug sample is not adulterated or misbranded for any reason, including:
  • Being out of date;
  • Labeling that has become mutilated, obscured or detached;
  • Evidence of having been stored or shipped under conditions that might adversely affect stability, integrity or effectiveness;
  • The sample is of a drug product that has been recalled or is no longer marketed; or
  • The sample is otherwise possibly contaminated, deteriorated or adulterated.(fn33)

If a sample is found to be unsuitable, the recipient charitable institution must destroy it or return it to the manufacturer. The regulations require charitable institutions to keep records of the disposition of all destroyed or returned samples.(fn34)

When a drug sample is delivered or collected, the recipient charitable institution must prepare a complete and accurate donation record containing: (1) the name, address and telephone number of the donating licensed practitioner or charitable institution; (2) the manufacturer, brand name, quantity and lot or control number of the drug sample donated; and (3) the date of donation. The charitable institution must retain a copy of the receipt for at least three years.(fn35)

The regulations require charitable institutions to maintain complete and accurate records of donation, receipt, inspection, inventory, dispensing, redistribution, destruction and returns sufficient for complete accountability and auditing of its drug sample stocks. In addition, all recipient charitable institutions must conduct, at least annually, an inventory of drug sample stock and prepare a reconciliation report comparing it to the results of the most recent prior inventory. Discrepancies and reconciliation problems must be investigated and reported to FDA. If the charitable institution becomes aware of a "significant loss" or "known theft" of drug samples, it must notify FDA within 5 working days.(fn36) The regulations do not set a threshold for determining what is a significant loss and there is no discussion in the preamble. However, FDA addressed the issue in some detail regarding investigations by manufacturers, as described above.

Finally, it is worth noting that the procedures described above are not the only ways charitable institutions may receive donated drug samples. In the preamble to the proposed rule, FDA stated that charitable institutions may receive: (1) direct donations of prescription drugs from manufacturers and distributors, with records of distribution and receipt maintained in accordance with state regulations; and (2) deliveries of drug samples to charity hospital and health care entity pharmacies from manufacturers or distributors, at the written request of a licensed practitioner, in accordance with the regulations on distribution of drug samples.(fn37)

The statute and regulations generally provide that no person may sell, purchase, trade or offer to sell, purchase or trade any prescription drug that was purchased by a public or private hospital or other health care entity, or donated or supplied at a reduced price to a charitable organization.(fn38)

There are a number of exceptions to this general rule. The prohibition does not apply to:

• Purchase or other acquisition of drugs between hospitals or health care entities that are members of the same group purchasing organization ("GPO"), or a purchase or acquisition from the GPO itself;
• Sale, purchase or trade, or an offer to sell, purchase or trade a drug: (1) by a charitable organization to a nonprofit affiliate of the organization as permitted by law; (2) among hospitals or other health care entities that are under common control; (3) for emergency medical reasons; or (4) the dispensing of a drug under a valid prescription; (5) by hospitals or health care entities owned or operated by federal, state or local governmental units to other hospitals or health care entities owned or operated by federal, state or local government units; and

• Sale, purchase or trade of, or the offer to sell, purchase or trade blood or blood components intended for transfusion.(fn39)

The return of a prescription drug that a hospital or health care entity purchases at a reduced price, or that is donated to a charitable institution could be viewed as a sale, depending upon whether and how credit is given for the return. However, the general rule prohibiting sales of donated or purchased drugs does not apply to returns by hospitals, other health care entities or charitable institutions of prescription drugs, provided that the following requirements are met:

• The hospital, health care entity or charitable institution documents the return by a credit memo specifying: (1) the name and address of the hospital, health care entity or charitable institution; (2) the name and address of the manufacturer or wholesale distributor from which the drug was acquired; (3) the product name and lot or control number; (4) the quantity of drug returned; and (5) the return date;

• The hospital, health care entity or charitable institution forwards a copy of each credit memo to the manufacturer and retains a copy for its own records (the FDA noted that the credit memo should be forwarded to the manufacturer to help ensure that any chargebacks or reduced prices are factored into a credit or refund provided by the manufacturer to prevent windfall profits from the transaction);(fn40) and
• Any drugs returned to a manufacturer or wholesale distributor must be kept under proper conditions for storage, handling and shipping, and written documentation showing adherence to such conditions is provided to the manufacturer or wholesale distributor.(fn41)

1. Authorized Distributors Of Record And Unauthorized Distributors

   The new regulations set conditions for the wholesale distribution of prescription drugs. They are intended to help trace the distribution chain of prescription drugs and increase the accountability of unauthorized wholesale distributors.

   The PDMA divides wholesale distributors into two groups: authorized distributors of record, and unauthorized distributors. An authorized distributor of record is defined as one with whom a manufacturer has established an ongoing relationship to distribute its products.(fn42) An ongoing relationship must be evidenced